The Securities and Exchange Commission may soon allow the trading of futures instruments on underlying stocks in U.S. markets.
That's according to Annette Nazareth, director of market regulation at the SEC, who recently spoke to attendees at the Security Traders Association's congressional conference in Washington.
Before trading can commence, however, a bill introduced by Sen. Phil Gramm, the Texas Republican who chairs the Senate Banking Committee, and Sen. Richard Lugar, (R-Ind.), chairman of the Senate Agriculture Committee, must be passed. The bill would reduce regulatory burdens in the futures markets. Without approval in the coming weeks, investors would likely have to wait until next year to trade the exotic instruments.
Nazareth said the agency and the Commodity Futures Trading Commission are discussing the possible changes. Only index futures are currently traded. Futures on individual stocks were banned in 1982 in a turf war between the SEC and the CFTC over regulation of the market.
In an interview at the conference, STA President Lee Korins said the SEC and CFTC talks are a surprise. He saw no economic justification for the financial products envisaged. There is no scholarly research exploring the impact that futures would have on their underlying securities, on options, or on indices that include the underlying securities, he said.
"Are we going to get to the point where we will have so many derivatives on an underlying product, that in cliche parlance, the tail is going to wag the dog all the time?" Korins asked. "Are we going to get to a point in time where 100 shares of IBM will trade somewhere, and $40 billion worth of derivatives will be priced off that 100 shares?" he added. "I mean, it's laughable, but it's dangerous."
In an interview, STA Chairman Robert King, executive vice president and director of OTC trading at The Robinson-Humphrey Company, said. "If they're going to trade [futures on underlying stocks] overseas, we might as well get ready."
"But Lee's right: we need to do a lot of homework," he added.
